What you need to know about Carbon Border Adjustment Mechanism?

After months of negotiations, EU Member States and the European Parliament have agreed on the world’s first Carbon Border Adjustment Mechanism. The CBAM is a tariff on carbon-intensive products.

Context

CBAM is part of the “Fit for 55 in 2030” package, the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, in line with European Climate Law.

The CBAM is the EU’s landmark tool to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU, and to encourage cleaner industrial production in non-EU countries.

Member States and Parliament agreed on Tuesday, December 13, on a new mechanism to attempt to impose European standards on the rest of the world, while deterring European polluters from outsourcing.

What is it, and who will be affected?

Also commonly known as a ‘carbon tax,’ the Carbon Border Adjustment Mechanism (CBAM) means foreign companies importing into the European Union allows them to apply the same carbon emission rules as European companies. As proposed by the European Commission, the CBAM will apply to the most-polluting industrial sectors: steel, cement, aluminum, electricity, and fertilizers, however it has also been extended to hydrogen, and will consider indirect emissions in the production process. All companies importing into the European market will be affected.

CBAM

How will this mechanism work?

When entering the European market, foreign companies will have to report CO2 emissions related to the product being marketed. If they exceed the European threshold, they will have to pay certificates whose value is indexed on the European carbon market. If a carbon market already exists in the exporting country, it will be taken into account: the company will only pay the difference. There will be no ceiling on these certificates, which should encourage companies to adopt greener production processes.

Will European companies exporting abroad be affected?

It is one of the sensitive issues still to be solved in the upcoming negotiations on carbon market reform. Exceptions could take into account current world market rules and not penalize the exporting company.

Another critical topic is the pace at which free emission allowances, , which have until now been allocated to certain industries to offset international competition, have been eliminated. With the CBAM, they can no longer exist because they would favor European companies and be deemed contrary to the rules of the World Trade Organization.

What safeguards prevent the abuses observed in the past on the carbon market?

Each importing company will pay an amount based on its declarations without the possibility of buying back rights, which should prevent these abuses. It does not remove the significant risk of misrepresentation, but the Commission intends to guarantee the smooth functioning of the mechanism at the European level; it promises to publish evaluations and carry out regular checks.

Next stage

Given the close links between the new CBAM and the review of the EU ETS, currently under negotiation between the co-legislators, the final technical details of the mechanism’s functioning will need to be clarified. Once the text has been finalized, the European Parliament and the Council must formally adopt the new Regulation before it can enter into force.
At Fairmat we welcome this new regulation, that will support our mission to stop landfill and encourage the recycling of carbon fiber with a low environmental impact.